In today’s economic climate, businesses are constantly looking for ways to cut costs without compromising employee benefits. One of the most effective yet underutilised strategies is implementing a Salary Exchange Pension Scheme.

Not only does this allow both employers and employees to save money, but it also enhances your workforce pension contributions a win-win situation for businesses and staff alike.

If you haven’t yet switched your workplace pension scheme to salary exchange, here’s why now is the perfect time.

What Is a Salary Exchange Pension Scheme?

A Salary Exchange Pension Scheme is a tax-efficient way for employees to contribute to their pensions. Instead of the employee making pension contributions from their net salary (after tax and National Insurance), they agree to reduce their gross salary in exchange for an equivalent employer pension contribution.

This means:

✅ Lower taxable salary = Lower National Insurance (NI) contributions for both employer and employee.

✅ Higher take-home pay for employees (as they pay less NI).

✅ Employer cost savings that can be reinvested in the business or additional employee benefits.

How Much Can Your Business Save?

NI costs for employers increased on 6 April from 13.8% to 15%

• One of the biggest advantages of switching to salary exchange is the National Insurance savings for employers and with NI costs increasing in April this is the perfect time to consider switching to salary exchange. 
• Employers will pay 15% NI on salaries above £5,000 per year (2025/26 threshold).
• Any amount an employee exchanges reduces the employers NI liability.

Example 

How it works 

This example shows how a salary exchange arrangement might affect both you and an employee with a personal pension. Salary exchange is being used to increase the pension contributions while maintaining the same take home pay. Let’s assume the employee is a basic rate taxpayer earning £24,000 a year. Before salary exchange you both contributed 5% to the pension scheme (£1,200 each).

Using salary exchange, the employee agrees to reduce their salary by £1,332 pa to keep the net disposable income the same and you agree to pass on 100% of your NI savings. 

The result

By reducing their gross salary, the employee reduces their tax and NI. Coupled with your NI savings which have been passed on, the pension contribution has increased from £2,400 to £2,716. That is an extra £316 a year paid into their plan without reducing their take home pay or costing you any extra. 

Here’s how it works for the employee:

	Before Exchange	After Exchange
Employee gross earnings	£24,000	£22,668
Income Tax	£2,286	£2,020
Employee NI	£914	£808
Gross Earnings less tax & NI	£20,800	£19,840
Deduct current pension contribution (net of tax)	£960	–
Net disposable income	£19,840	£19,840

Here’s how it works for the employer: 

	Before Exchange	After Exchange
Employee gross earnings	£24,000	£22,668
Employer NI	£2,056	£1,872
Employer pension contributions	£1,200	£2,716 (your contribution + employee’s salary exchange + your NI saving)
Cost of employee to employer	£27,256	£27,256

 

Employee Benefits: Higher Take-Home Pay & Enhanced Pensions

Switching to salary exchange doesn’t just benefit the business; employees also stand to gain.

• Higher Net Pay: Employees pay less National Insurance, meaning they take home more of their salary.
• Increased Pension Contributions: Some employers reinvest NI savings back into employee pensions, boosting retirement savings.
• Long-Term Financial Well-Being: Employees can grow their pension pot more efficiently with no extra cost to them.

Why Businesses Should Act Now

Many businesses still haven’t taken advantage of salary exchange, often due to misconceptions about complexity or administration. However, most modern payroll systems make implementation seamless, and the savings far outweigh any initial setup effort.

Key Reasons to Make the Switch Now

• NI Costs Rising – In April Employers NI is increasing to 15% from 13.8%. 
• Reduce Payroll Costs – Cut NI expenses without reducing salaries.
• Boost Employee Benefits – Offer an attractive pension scheme at no extra cost.
• Improve Recruitment & Retention – A strong pension scheme helps attract and retain top talent.
• Easy Implementation – Many payroll providers offer automated salary exchange options.

Final Thoughts

Switching to a salary exchange pension scheme is a simple yet powerful way to save money while improving employee benefits.

With rising costs affecting businesses, every £1 saved on National Insurance can be reinvested where it matters most whether that’s business growth, employee perks, or increasing pension contributions.

If you’re ready to make your business more tax-efficient and employee-friendly, now is the time to explore salary exchange pension schemes.

Need Help Getting Started?

Shrewd HR has partnered with Stephen Hope Wealth Management to ensure you receive expert advice and are supported to ensure a seamless process to switching your pension scheme.   

The sooner you make the switch, the sooner you and your employees start saving. Why wait?